We can auction carbon permits or levy carbon fees/taxes upstream (at the mine mouth or well head, or on import or refining) or downstream, where fuel is actually burned. The main argument for levying downstream is that it will distribute the burden of who pays differently than levying upstream, because the fossil fuel industry won’t be able to pass all of the fee or tax along. Most other arguments for downstream emissions pricing depend on that as a premise.
In my last post I pointed out that a gasoline tax, which is levied about as far upstream as possible, still ends up with about half the cost pushed back (PDF) to the producers. Since that thread has grown very long, I want to point out that general economic theory holds that where a consumption tax is levied generally does not affect tax incidence. To translate that from economic jargon: even if the store writes the check to the government, the customer still pays a lot of the cost. If the customer had to write the check to the government, the store would have to lower prices to make up for some (but not all) of the payment by the customer.
One good test for this is to compare Value Added Taxes (VAT) to Retail Sales Taxes (RST). VAT is charged at every step in the economy, with only a minority charged “downstream," whereas RST is charged completely downstream. Now, there are not a lot of studies about this, because proving that water is wet does not make for interesting academic work. But one recent Canadian study did focus on tax incidence for Canada where there has been some shifting from RST to VAT. It found no significant difference. In fact it found that consumer bore a slightly higher portion of the VAT than they did of the RST. I’m guessing the reasons are ones that would not apply to an emissions tax.
Other studies of VAT also compare empirical data on tax incidence to RST, usually in passing, and find no significant difference.
The advantages of upstream levying are obvious. There is less room for accounting tricks, game playing, and even outright fraud. There is more transparency because you have less data to juggle, so discrepancies are easier to spot. There are fewer actors to enforce regulations against, so enforcement is easier. And as a bonus, there is less red tape and paperwork.
I would say that at this point, anyone wishing to argue that the tax incidence differs for upstream and downstream emission pricing needs to provide empirical data.